Friday, June 19, 2009

The Experiment with Tyco

I am publishing this trade virtually because I think this is a good trade but I am on options rookie so I am trying out my playbook here.

Here's what I read on Friday Jun 19th Quadruple Expiration Day.

Tyco has been trading in a reasonably tight range recently, and that has prompted one options trader to step in.The security company is down just $0.04 on the day to trade at $26.85. It broke above $29 on the first day of the month, after a run up from near $17 in early March. TYC shares have gotten back above the 200 day moving average, through which the stock broke down back in August when the price was above $40. The options trade is out in October, with the 26 puts and the 27.50 calls. There were 6,524 contracts traded in each at the same time. This appears to be a short straddle, with the October 26 puts sold for $2.05 and the October 27.5 calls traded for $2 even. If this was in fact a volatility sale, the trade will profit up to $31.50 and down to $22. This trade would go along with the falling volatility levels. Implied and historical volatility are both around 39 percent, continuing to fall over the last four months and now at their lowest levels since last October.

PLAY 1 - Short Straddle on Jul 27.5 TYC
I didnt know how to take advantage of this today but now sitting here at home with my playbook I am wondering what would happen if I were to do a short straddle myself but do it for July instead. Selling TYCSY this evening if it was possible would net me 1.40. Selling TYCGY would net me 0.75 for a total of 2.15 for the trade. Ofcourse a short straddle has unlimited risk on the upside substantial downside risk but given the low volatility of the stock - collecting 2.15 doesnt sound bad does it? We will revisit this trade on Jul expiration and see where we sit.
I can tolerate a fall from current price to 24.87 to a rise upto 28.87

PLAY 2 - Short Strangle on Jul 26 and 27.5 TYC
Sell TYCSK (Jul 26 TYC Put) - 0.7
Sell TYCGY (Jul 27.5 TYC Call) - 0.75
Yielding a net 1.55

Of the two plays - Play 2 Yields a lower amount but I like it better ! With Play 2, I can tolerate a fall in the stock price upto 24.50 and a rise upto 29. As you can see with Play 2 - I have a better tolerance of swings in price. Looking at TYC charts - I see the 50-200 golden cross (bullish) but a parabolic stop and reverse (bearish). Near term I think the bearish trend wins and we should see price gradually migrate downwards with first resistance at the 50 day MA. If it goes through that the very gradually sloping 200 MA is at around 24. As I think out loud here - perhaps it might be better to wait nearer term to see if TYC bounces at the 50 day MA before jumping into the short strangle. Will update as I have time.

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